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Second internet revolution will transform lives

AOL founder Steve Case discusses his strategy, investments with his firm Revolution, and his role as one of America’s most prominent advocates for start-ups in Washington

Mon, Oct 21, 2013, 01:00

William Frick

“There’s no question that there are two Americas,” according to Steve Case, AOL founder turned VC and entrepreneurship advocate.

“There’s the America where entrepreneurship is celebrated and supported, places like Silicon Valley and Boston, and there’s the rest of the country where the culture tends to be kind of risk averse.”

While Silicon Valley continues to dwarf other regions around the world in terms of venture capital investments and successful exits, Case is placing his bets across the rest of America, on what he calls “the rise of the rest”.

In conversation with Walter Frick, associate editor at the Harvard Business Review, Case discusses his strategy, his investment interests with his firm Revolution, and his role as one of America’s most prominent advocates for start-ups in Washington.

Tell me about your mission to support entrepreneurship and why you think it’s so important.The American economy was built in large part on entrepreneurs over the last 250 years that helped pioneer companies – first an agricultural revolution, then industrial revolution, and more recently the information revolution. And that’s resulted in a strong economy.

If we want to continue to have a strong nation, we need to have a strong economy. If we want to have a strong economy, we need to make sure we’re tilting the playing field in favour of entrepreneurs that are trying to challenge the status quo, innovate, create new products and services, disrupt existing industry, usher in a new way. Because if we don’t do that, somebody else will.

It can get a little tricky defining entrepreneurship versus small business versus start-ups. How do you define the kind of entrepreneurship you’re talking about?I view business as having three sectors: big business (Fortune 500); small business (Main Street – restaurants and dry cleaners); and high-growth start-ups. Big business is important, obviously, but in aggregate, they’re not net job creators. Some rise, some fall.

Similarly, small businesses in aggregate are an important part of the economy, they account for a lot of jobs, but as a class they don’t account for many net jobs. A restaurant might start; it’s usually taking over from a restaurant that failed and so there’s a churning.

The place where the innovation happens and the economic growth happens and the job creation happens is in this high-growth entrepreneurial sector. So to me, that’s the key sector to focus on. And the difference is, they usually do start as an idea with a small number of people, but aspirations to grow to become a significant company.

What do you say to someone who’s sort of cynical about the social benefits of that kind of entrepreneurship? Say, toward venture capitalists pouring money into the next photo sharing app.First of all, venture capitalists tend to focus in a few places, in a few sectors. And the American entrepreneurial economy is much broader than that.

While the headlines may go to Facebook or now Twitter because they’re going public, some of the great success stories over the last decade are Chobani yogurt – upstate New York, billion dollar sales, 3,000 employees; eight years ago it was a failed factory in upstate New York. Or Chipotle, $12 billion market value right now based in Denver. Under Armour, athletic- wear company based in Baltimore. Groupon in the social commerce space, based in Chicago.

I think venture capitalists do play a role. If you look at the last 20 years or so, venture capitalists did help make the internet possible, did help make biotechnology possible, are driving a lot of investment in energy technologies and transportation technologies and government services and educational services and healthcare and so forth. They are fuelling innovation and growth.

But part of the opportunity is to move beyond just the traditional sources and fairly limited sources of capital, to have more capital available, more entrepreneurs and more places focused on building more kinds of companies all across our economy.

You talked about access to capital. What are some of the other most common barriers that you see to these kinds of companies being formed?Talent, which is why immigration policy is critically important. We’re still doing a pretty good job of attracting people to come to the Harvards and MITs of the world.

In fact the majority of people now who are getting PhDs and masters are from other countries, but then we kick them out. And sometimes they have an idea that they want to build here or they’re part of a team that’s building something. They aren’t allowed to do that.

So what sectors or trends are you most excited about?One theme is what’s called the second internet revolution. By now people understand the importance of internet, are connected across multiple devices, multiple networks, mobile, so forth. So that first internet revolution we’ve largely accomplished.

The second internet revolution is not necessarily building more internet companies, although there will always be opportunities to do that, but using the internet to transform other aspects of our lives that really matter, things like our health and wellness, things like learning, things like transportation services, using the internet as that disruptive change agent.

How is the second internet revolution going to be different from the first? We believe [the government’s role] is going to become much more important in the second internet revolution than it was in the first internet revolution. And the reason for that is government is both the principal regulator and also the principal customer of things like healthcare, things like education. And so I think the centre of gravity will shift.

Understanding how to interact with government is going to be more important, because you want to revolutionise, say, education, kind of follow the money.

So you have to have constructive engagement with government if you’re trying to revolutionise industry where the government is regulator and the government is far and away the largest customer.